Posted by: Josh Lehner | October 19, 2018

Fun Friday: Alcohol, Marijuana, and Tech

Happy Friday everybody! A friend of the office recently noted that we haven’t been discussing beer nearly enough lately. And it turns out she was right. After our office’s first, real recreational marijuana forecast last year and the Oregon Vice research and presentation I did, our office has been mostly focused on the evolving macro environment this year (more next week). Given this, and the fact that our office recently reconvened our marijuana forecast advisory group, I thought I should rectify the oversight.

Let’s start first with an update to the comparison you never knew you wanted, but are now glad you have. Over the past decade, or since the start of the Great Recession, Oregon’s thriving alcohol, and marijuana sectors have added more jobs than one of the state’s economic pillars: the high-tech cluster. Of course these economic sectors are not directly related, but instead are being used to help frame the discussion for just how fast, and how many jobs are being added here in the state.

We use this chart regularly in our presentations to discuss a variety of legitimate economic topics, including the transition from hardware to software within the tech industry, in addition to the true economic impact from vice sectors lies not with the growing and retailing of the products, but in all the ancillary and support industries that grow along with consumer demand and evolving markets. At its roots, Oregon’s alcohol cluster is value-added manufacturing where firms take raw ingredients — many of which are locally-grown — and turn them into a much more valuable products sold across the state and increasingly around the world. Furthermore, a plurality of brew system manufacturers in the U.S. call Oregon home. So when a new brewery opens up elsewhere in the country, there is a good probability they are buying and using Oregon-made equipment.

Our office’s hope is this type of cluster similarly develops around the recreational marijuana industry as well. Prices continue to plunge as the market matures and marijuana commoditizes. But increasing market activity in extracting oils, creating creams, making edibles in addition to hopefully building up the broader cluster of lab testing equipment, and branding and design firms, means Oregon will see a bigger economic impact from legalization.

Note that the reason for the range of marijuana-related employment in the chart is due to data availability. Our friends over at Employment do a great job of matching employment records to OLCC licensed businesses. Their latest count totals 5,300 jobs in Oregon. Now, these are payroll jobs (technically jobs subject unemployment insurance). Given harvest seasonality, part-time work, independent contractors and the like in a still federally illegal industry, it is reasonable to expect these payroll jobs to be more of a lower bound. However, if we turn to OLCC marijuana worker permits, those currently number 36,000 which is too high. Triangulating a more reasonable estimate — either via a rough sales to employee ratio, or scaling by a similar factor as food handler cards to food service jobs — shows there are probably about 11,000 or 12,000 marijuana-related jobs in the state today.

Finally, I have also been updating my Oregon brewery production numbers to track start-ups, the state’s legacy breweries, and also closures or failures. Given the outright declines in the beer industry overall, and slowing growth in craft beer sales, there has been quite a lot of hand-wringing over what it means. No doubt, retail shelf space is limited and the competition is fierce. Some breweries are seeing substantial declines in their sales and production. However that does not mean the industry overall is unhealthy. In fact, brewpubs continue to thrive, and some of the bigger breweries are revamping their tasting rooms, and adding more locations for better direct-to-consumer sales given they maximize revenue per pint this way. Elon Glucklich at The Register-Guard has great article on this, with a focus on Eugene breweries.

However, as Warren Buffet said, “only when the tide goes out do you discover who has been swimming naked.” For breweries this means that business plans, practices and operations matter considerably more in a world of slowing growth then they do during the go-go days of double-digit gains every year. Slower growth can strain business finances, eventually leading to more closures or failures. So, are we seeing this here in Oregon? So far the answer is no. Yes, the absolute number of brewery closures has risen in recent years, but the closure rate has barely budged. The reason is Oregon has quadrupled the number of breweries in the state over the past 15 years. As such, we should see more closures given there are so many more potential places to run into issues — be they low sales, high costs, personal problems, or the like. To date, Oregon breweries are closing at a significantly lower rate than other types of businesses across the state.

Next week I will have a few posts on the macro outlook, as we meet with our economic advisors to nail down the 2019-21 biennium outlook. Our forecast will be released Nov 14, at which time we will also have an updated recreational marijuana forecast that incorporates all of the latest data and input from our advisors.

Last but not least, a special thank you to Beth Dyer at Employment for helping me get all of the industry data to build the clusters!

Posted by: Josh Lehner | October 5, 2018

Oregon Personal Income Update, 2018q2

Last week the U.S. Bureau of Economic Analysis released both the latest estimates for state personal income along with their comprehensive revisions they do every 5 years. These big, comprehensive revisions occur first at the U.S. level and were released over the summer. They have now filtered down to the state level estimates and are pretty big here in Oregon.

First, however, let’s take our standard snapshot of how incomes are growing here in Oregon over the past year and the past quarter. Overall personal income in the state is up 4.7% over the past year, and up 4.4% over the past quarter (on an annual basis). This growth was pretty consistent across the various types of personal income, from wages, to dividends, and the like. The one exception is the volatile farm income which gets pushed around not just by harvest, but the value of the US dollar and commodity prices. All told, Oregon’s income growth is above average, but is no longer growing at the peak growth rates seen a few years ago.

While the latest data brings good news and confirms what we’ve seen in the more timely economic data, the bigger story from the release are the comprehensive revisions. As you can see below, much of history remains the same, but Oregon’s income has been revised upward pretty significantly in recent years. This revision amounts to about +$7 billion, +3.6%, in 2017 alone.

The importance here is twofold. First it indicates that Oregon’s economy has performed better than we first thought. The total amount of personal income earned by Oregonians is larger than we thought based on the prior estimates. This is good news! Second, however, these revisions mess with our underlying forecasts as we use this data in our economic and revenue models. Everything else equal, these upward revisions mean more income for Oregonians moving forward because the jump-off point from where history ends and our forecasts begin has now been shifted upward. That said, this does not necessarily translate into more tax revenue in our forecasts because it’s not like tax collections were also revised higher for 2016 and 2017. We know how much money was collected. So the impact here on our forecasts is more about how do these revisions, plus everything else going on in the economy, affect our expectations moving forward. We are meeting with our advisors next week, and again in a few weeks as we work to finalize our next forecast — due out November 14th.

In terms of the breakdown of the revisions, an interesting pattern is seen. Two-thirds of the revisions came in investment and business income. This pattern largely matches the U.S. revisions over the summer. As the BEA noted earlier in the year, they were incorporating updated and new IRS tax return data for corporations, sole proprietors, and partnerships. Essentially, the prior income figures had significantly underestimated these revenues (but we have certainly seen this growth on the tax collection side in recent years).

The remainder of the revisions had less of an impact on the topline. That said it was interesting to see that benefits for workers (supplements to wages) were revised up more than wages. In recent years we have seen a gap emerge between different wage measures here in Oregon; namely the BEA measure of wages has lagged withholdings and also the QCEW wages. These revisions help correct some of that gap.

Finally, these income revisions have boosted Oregonian incomes to a larger degree than the typical state. As such, Oregon’s per capita personal income, relative to the nation, has been raised. Oregon currently stands at 93% of the U.S. average, the highest point we’ve seen since the dotcom crash in 2001. Oregon’s average wage currently stands at 94% of the U.S. average, the highest point we’ve seen since the mills closed in the 1980s. These gains are driven by the stronger economic expansion Oregon has experienced in recent years. The expansion is reaching all corners of the economy and of the state. And Oregon’s median household income is now on par with the U.S. overall.

 

Posted by: Josh Lehner | September 26, 2018

Peak Renter in the Rearview

Three years ago our office asked “Is 2015 Peak Renter?” We laid out a straightforward case examining the three main underlying drivers for the shift into rentership over the previous decade: household finances, demographics, and preferences and tastes. The question was not whether the pendulum would swing back toward ownership, it definitely would, but rather when would it would begin to swing back. Overall that piece got a lot of attention. Bill McBride of Calculated Risk even talked about it on one of his Bloomberg TV appearances! But I also think it is fair to say the work was also greeted with a healthy amount of skepticism at the time. Weren’t we destined to be a nation of renters forever?

Of course over the past couple of years ownership has rebounded nationwide and depending upon the data set you look at, Peak Renter occurred in 2015 or 2016. Furthermore, these gains are not concentrated in one particular region or another, but are spread across much of the country. Among the 100 largest metro areas, 79 of them saw ownership rates increase last year. There has been a steady increase in the number of large metros with rising ownership rates as seen below.

Here in Oregon ownership rates are increasing in the Bend, Eugene, Medford, Portland, and Salem metro areas. Additionally, the Albany, Corvallis, and Grants Pass MSAs have seen ownership rates stabilize in recent years if you look through the year-to-year noise. That said, the largest ownership rebound in Oregon is happening in the Portland region. Ownership rates bottomed in 2014 and are now nearly two-thirds of the way back to where they were prior to the bubble bursting and foreclosure crisis.

Maybe somewhat surprisingly, this strong rebound in ownership is concentrated among the younger households — the region’s 20- and 30-somethings. As discussed last week, this increase is driven by young, married-couple families. Now, Portland does not have especially high ownership rates. Among 25-34 year olds, Portland homeownership rate ranks 68th highest among the 100 largest metros in 2017. That said, this increase in recent years is the second largest among these same regions.

The big homeownership question was not whether Millennials would buy more homes as they aged, be it detached single family, townhomes, or condos. But whether or not they would do so at a faster or slower pace than life cycle trends suggested. Remember, even in recent years, by the time you are in your mid-30s, the population is 50/50 in terms of owners and renters. Well, it turns out to be a little of both. Millennials are living on their own, getting married, and buying homes at a slower pace or at a later age than previous generations, but the ownership rate itself is rebounding faster than expected at the same time. It’s competing long-run and short-run impacts coming to a head, if that makes sense.

Finally, during and after the foreclosure crisis, single family rentals increased as investors snapped up properties at bargain prices. There was a lot of discussion about whether or not this was a good development and what it meant for the housing market. What’s interesting in recent years, however, is that single family rentals in the Portland region, and across the country, are declining. Investors and landlords are selling their properties as prices have rebounded, pocketing a big increase in home equity along the way.

This added wrinkle means we are seeing a shift in the types of rental properties in the region. The number of apartments continues to increase with new construction, but the overall rental market has expanded less given this decline in single family rentals. Conversely, the ownership market has expanded a bit more than the new construction numbers indicate as more homes are being converted (reconverted?) from rentals into ownership product. This impact is not small. We have seen around 10,000 fewer single family rentals in recent years. This is equivalent to 1-2 years of new apartment, or new single family supply! This shift under the surface of the overall market helps make sense of the new construction figures. It is not just about new residents, or newly formed households moving into the new apartments, but also about reallocation of existing households across or between product types.

Bottom Line: Homeownership is increasing in recent years. Given the ongoing economic expansion, and demographics, the total number of homeowners will certainly increase, while ownership rates are likely to as well, or at least hold steady. Some housing economists are particularly bullish on the 2020s when the Millennials will be in their 30s and 40s, or at ages when most households own. That said, today’s younger households are buying homes a bit less than previous generations at the same age. There is a generational effect influencing the housing market both from an ownership perspective and a type of housing, or the location of housing wanted as well. There are a lot of levers here to pull that can adjust to meet the needs of a growing population. Here in Oregon, we will see an increase in both owner and renter households due to population growth. The key is to continue to add new supply across a range of product types to ensure availability, and help with affordability.

Posted by: Josh Lehner | September 21, 2018

Fun Friday: Marriage in Oregon

In digging into the latest Census numbers, I have been updating all of our office’s work on housing, household formation, affordability and the like. Homeownership continues to be on the rise and I will get to the latest Peak Renter numbers next week. That said, it is clear that the ownership rebound in recent years is concentrated among younger Oregon households. Halfway down this housing research trail I stumbled upon the following chart. The increase in younger owners is primarily among married-couple families. This is important for housing in that homeownership for married-couple families is 20 percentage points higher than for other household types, and they comprise 60% of all homeowners in Oregon. So off on a detour, down the marriage research rabbit hole I went which we will explore a bit on this Fun Friday.

I have a typical story I tell when giving presentations on how Millennials are indeed getting married, buying homes, having kids and the like. They are not foregoing these major life events, but they are doing so a few years later than previous generations. The story is largely about how the life cycle effect dominates the trends even though there are, at times, sizable generational effects.

In terms of marriage, this next chart shows both the life cycle effect  — the arc of the curves; as we age the share of us who have ever been married increases — and the generational effect — each line represents a birth cohort; some are higher or lower than others. This chart fascinates me. We know that the current crop of Millennials are getting married less compared to the Silent Generation and oldest Baby Boomers. However what I was surprised by is that today’s Millennials aren’t that different than the previous century‘s Millennials (the 1885 birth cohort)! Who gets married and at what age has clearly evolved, and continues to evolve today.

This evolution is very interesting and Cato Unbound had a great set of articles on marriage a few years back including an article by renowned family and marriage researcher Stephanie Coontz, and an article by economists Betsey Stevenson and Justin Wolfers. The kicker is not that Betsy and Justin are great economists in their own right, which they are, or that they are married to each other, which they are, no, the kicker is that they are renowned for their economic research on love and marriage. You can’t make this stuff up; it’s adorable!

What the research finds is that this evolution is in part about the shifting nature of work, in addition to the availability of different products and services that make domestic/household duties easier than in the past. In economic parlance, as Betsy and Justin write in the article, marriage has shifted from a “forum of shared production, to shared consumption.” What that means is marriage is more about love and companionship these days —  a hedonic marriage — and it does give rise to assortative mating and the like. Marriage is no longer primarily about matching specialized workers together — one in the marketplace and one at home.

As this evolution continues, we are seeing the median age rise at which Americans and Oregonians first get married. The latest Census data show that here in Oregon this age reached 30 years old for men and 27.8 years old for women in 2017. As far as I can, given available data, these readings in recent years are a record. That said, they are more of a return to rates seen 100-150 years ago than they are just a divergence from the high marriage rates at younger ages seen in the 1950s and 1960s, which were themselves records in the other direction.

As marital status evolves, we can see the trends by also looking at age cohorts. The number of single, never married Oregonians is rising across all age groups. However this increase, coupled with declining marriage rates is especially seen among the 20-somethings. One other interesting thing to note is that the divorce bubble has clearly burst. Divorce is on the decline in recent decades. In their article, Betsy and Justin discuss how the rise in divorces was in part a response to the shift from marriage being about shared production to being about share consumption. To the extent that marriage today really is about love, companionship, and sharing interests and activities together, then it makes sense that divorce is less frequent.

All told, marriage patterns continue to evolve. Given the generational data, the median age at first marriage will continue to increase at least in the near-term. These shifts also do have wide-ranging impacts throughout the economy. One of which is the impact on household formation and homeownership. At least when compared to a generation or two ago, there is a longer time period from when one leaves the nest and when one settles down, gets married, buys a house, has kids and so forth. There will also be a larger share of Oregonians moving forward who chose to do none, or just some of these things as well. That said, a majority of Oregonians will still chose to do these major life events, but at a somewhat later age than in the recent past.

Stay tuned for at least one future post on birthrates in addition to a follow-up next week on homeownership in Oregon and across the country.

Posted by: Josh Lehner | September 13, 2018

Urban Oregon Household Income, 2017 Update

This morning the Census Bureau released the 2017 American Community Survey data. There is a ton to unpack here and even more once the microdata is released later this year. In the coming months our office will update and share some of this work.

As discussed earlier, Oregon incomes continued to rise and the poverty rate ticked down. This post is a quick update on trends we are seeing across Oregon’s metro areas. For rural income trends, we need to wait until December when the 5 year ACS estimates are released.

First, let’s start with the Rogue Valley where household incomes have seemingly lagged underlying economic growth in recent years. The latest figures show solid gains in both Medford (Jackson County) and Grants Pass (Josephine County). The data is a bit noisy so I usually use a two year average to help smooth it and get the underlying trends. This is especially useful for a smaller area, and thus smaller sample size, like Grants Pass. As you can see in the dotted line (annual numbers) the region has seen two strong gains in the past three years, but also a year of large losses. Expectations are that moving forward, there will be more sustained momentum in the Josephine numbers and incomes will continue to increase. That said, some year to year volatility is to be expected. Medford

Traveling north on I-5 a bit, incomes throughout the Willamette Valley continue to show good growth in the latest data. Salem and Corvallis incomes are now at historic highs, while Albany and Eugene incomes are essentially back to where they were at the start of the Great Recession.

Further north, the Portland region continues to see strong gains. Like the state overall, 2017 increases were a bit slower, but continue to outpace most other large metros across the country. The Portland MSA’s median household income now ranks 16th highest among the nation’s 100 largest metros. In 2007, Portland ranked 32nd highest. As noted in the statewide trends, the leveling out of the poverty rate was also seen in the Portland region. Similarly, the poverty rate differences between racial and ethinic groups was evident in Portland as well. As such, it is reasonable to conclude that outside the Portland area, Oregon’s poverty rates continued to decline.

Finally, let’s cross the mountains and check in on Bend where we know growth has been and continues to be robust. Household income in Deschutes County saw another strong year in 2017 and compared with the other housing bust metros across the country, Bend continues to outperform. Among these 50 metros, Bend’s income growth since the onset of the recession ranks 5th best. Medford, which is also among the worst housing bust metros nationwide, ranks 15th best.

Posted by: Josh Lehner | September 13, 2018

Oregon Poverty and Progress, 2017 Edition

This morning the Census Bureau released the 2017 American Community Survey data. There is a ton to unpack here and even more once the microdata is released later this year. In the coming months our office will update and share some of this work.

As expected, the latest Census data shows that Oregon’s economy continues to get better. Major economic markers like median household income and the poverty rate are showing ongoing improvements. That said, 2017’s gains are a bit slower than those seen in 2015 and 2016. This is in-line with what we’ve seen in the real-time data like withholdings out of Oregonian paychecks and the monthly job numbers. Oregon’s economic expansion is transitioning down from those peak growth rates a couple years ago to something more sustainable, and eventually something closer to growth in the working-age population. As such, Oregon’s gains in 2017 were essentially in-line with nationwide improvements instead of outpacing nearly all other states like we did a couple years ago. And as we will get to in a minute, there is one potentially worrisome sign that will require a big more digging to figure out what exactly is going on.

First, let’s take a look at historic trends in median household incomes here in Oregon and across the country. In terms of how the typical Oregon household stacks up to the U.S. this is our office’s preferred measure — not per capita personal income. The good news is that the improvements seen in the past few years are sizable. Oregonian incomes today are at their historic high — at least when using PCE as the deflator — and just like last year, they have essentially caught up to national incomes, which is something we haven’t seen since the mills closed in the 1980s.

In looking at the major drivers of median household income in Oregon last year, they are a bit more of a mixed bag than a year ago. The good news is the economy continues to employ more Oregonians and more importantly, even more Oregonians on a full-time basis. This is the major driver of the household income gains. And this is exactly what we want to see. That said, earnings for full-time workers increased by about $1,000 which was just 2.1%. Overall, the nominal increase of 4.7% household income growth is solid, and in-line with the national increase.

The one worrisome spot is that the bottom 20% of households did not see income gains last years. The top 80% of households did see gains and the improvements were strongest in Oregon for the second and third quintiles — those in the $25,000 to $74,000 range. However, incomes for the lowest quintile took a step back back in nominal and real terms. This feeds directly into the poverty rate numbers we will discuss in just a minute. But first, this decline in incomes for the lowest quintile is a surprise. This quintile had seen the strongest gains in recent years — driven by the labor market. The question is whether or not it is a real decline, or potentially just noise in the data. It is also possible that it is driven by stronger household formation, in addition to age-specific household formation, which would or could alter the overall distribution. For now that is my hunch, but I do not know for sure and we will need to wait for the microdata here in another month or so to dig into it.

When we see that incomes for the lowest quintile of Oregonians did not improve, then it should come as no surprise that Oregon’s poverty rate did not improve significantly over the past year either. Now, the rate did tick down from 13.3% in 2016 to 13.2% in 2017 which is still progress, just maybe not as much as one would have expected given all the other available data. That said, this marks the lowest Oregon poverty rate since 2007 when it was 12.9%. The last time Oregon saw sustained rates this low was in the 1990s, although we have a ways to go to reach those figures.

In decomposing the poverty rates just a little it shows a couple of things. First, we are seeing ongoing improvements in the poverty rate itself, but also for those in deep poverty (less than 50% of the poverty threshold) and those doing just a little bit better than the threshold. But we are seeing significant improvements among our communities of color, while poverty rate figures for whites held steady last year. The biggest improvements, particularly among those in deep poverty were seen among Oregonians identifying as black or Hispanic or Latino. Now, poverty rates remain significantly higher for our communities of color than they do for whites, but for the first time this gap narrowed just a bit.

Bottom Line: Oregon continues to be in the feel-good part of the business cycle. That said, as we return to roughly the same vantage point as prior to the Great Recession, progress moving forward may be harder to come by. The cyclical improvements are essentially complete — incomes back up, poverty rates back down, as is unemployment — so further progress will be about fundamental gains and improvements, not just about returning to the status quo, which for many Oregonians and Americans wasn’t that great even a decade ago. As I tend to say in presentations, in the big picture, Oregon is now doing better than during the housing boom, but we have further to go to reach the better days seen in the late 1970s and late 1990s.

Coming up this afternoon will be a high level look at household income trends in Oregon’s metro areas.

Posted by: Josh Lehner | September 10, 2018

PSA: New Census Data, Put Your Hands Up!

It’s that time of year again where we get new Census data! This week we will get 2017 snapshots of income, poverty, household formation and the like. First up will be the Current Population Survey estimates, followed a day later by the American Community Survey. Here’s how I will be celebrating this week. True story.

It’s important to keep in mind that all of these data are backward looking. They tell us how things changed a year ago. That said they are very important markers that track socio-economic progress. In advance of the new data, I thought I would lay out a few expectations of what we think the data will, or should show. These are largely a continuation of the trends seen in recent years. The big picture should show continued improvements across a broad range of metrics including by region, by quintile, by age, by race or ethnicity and the like.

  • Household incomes rising across the board and the poverty rate taking another step down. That said, median household income unlikely to rise quite as much as the past couple of years (6-7% not adjusting for inflation). The underlying dynamics will be what I’m watching for. The change in the number of households, number of workers, number of full-time workers, and changes in wages. All of those drive overall household income trends.
  • Depending upon which inflation measure you use, inflation-adjusted income gains are likely to be less. Headline inflation (CPI or PCE) was 0.9% or 0.7% faster in 2017 than in 2016. If you use core inflation — excluding food and energy prices — the results will be more stable.
  • Regional income differences in Oregon. The Willamette Valley and Bend should see ongoing gains and we should finally see a pop in the Rogue Valley numbers where household incomes have lagged underlying economic growth. There is an outside chance all of our metro areas’ median household incomes will be above their pre-recession readings on an inflation-adjusted basis, except for Grants Pass. Portland and Salem are already there. Bend, Corvallis, and Eugene are close. Albany and Medford are within striking distance.

Additional housing-related items I will be watching include homeownership rates by age group, household formation by age group, changes in the local distribution of household incomes. For comparisons, I will be updating income, homeownership, and educational attainment for the 100 largest metro areas in the country. I will also be updating prime working-age employment rates for metros and states. We will also get updated numbers for a whole host of measures including broadband access, commuting and the like.

Unfortunately we will have to wait until October for the underlying microdata where we can crunch some numbers ourselves and do more in-depth analysis. And for those interested in data for all counties, or smaller geographic areas like block groups, we have to wait until December when the 5 year ACS estimates are released.

Stay tuned for periodic updates here on the site and in our presentations as we unpack this annual data present.

Posted by: Josh Lehner | September 7, 2018

Fun Friday: New Construction Lot Size

The Census Bureau recently released the 2017 Survey of Construction where they look at the characteristics of new construction, both single-family and multifamily. The National Association of Home Builders has dug into the numbers some and highlighted trends for both the lot size and lot values across the country for new single-family construction. In the big picture, the typical lot size has been declining for some time, while lot prices on an inflation-adjusted basis remain steady. However there is a lot of variation underneath these figures, so I thought I’d dive in as well.

First, a NAHB map showing how the typical lot size for new construction varies across the different Census divisions (the lowest level of geography for which data is available). The Pacific Division has the smallest lot size at 0.15 acres which is roughly 6,500 square feet.

Depending upon where you live here in Oregon a 6,500 square foot lot is either pretty big, fairly typical, or even small. For example, the classic single family parcel in the City of Portland is 5,000 square feet, and the most common residential zoning in the City of Bend, and City of Salem call for 4,000 square feet. That said, Beaverton has a lot of 5,000 and 7,000 square foot lots, Medford is primarily 7,000 and 10,000 square foot lots, while Lake Oswego has mostly 7,500, 10,000, and 15,000 square foot lots. Rarely are homes built on larger parcels than these, both due to development codes and the fact that most new construction takes place in urban areas, or on the urban fringe. New construction in rural areas tends to be on larger lots — measured in acres, not tenths of acres — but represents a small share of overall construction activity.

In terms of how big these new homes are and how much they cost, there is somewhat of a pattern based on lot size. Generally speaking, with a larger lot, a bigger home is built, and the sale price is higher as a result. However when it comes to the small and medium-sized lots, there is less variation in the size of homes built and their sale price.

There are quite a few things going on here that we are not able to untangle with this particular data set. In the least charitable description, one could say developers are taking advantage of the smaller lots, building the same sized house and charging the same amount, or more, and thus reaping higher profits. However, these smaller lots tend to be more centrally located within urban areas where land values are higher due to stronger demand. As such, a more likely explanation would be that by spreading the high land costs across more housing units, builders are able to deliver the same sized house for roughly the same price as those built on somewhat larger lots that are likely less centrally locate. In this sense, smaller lot sizes act to help with affordability.

Stay tuned, next week we get a plethora of new Census data on household incomes, poverty, household formation and the like. #CannotWait

Posted by: Josh Lehner | August 29, 2018

Oregon Economic and Revenue Forecast, September 2018

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

While economic growth continues and nearly all leading indicators flash green, the shape of the business cycle may be coming into focus. Specifically, economists are becoming more comfortable talking about plausible recession scenarios given the expected path of federal policy. To be clear, the flow of economic data remains healthy, and the risks to the near-term outlook are balanced, if not tilted toward the upside.

However, potential danger lurks around the corner with many forecasters pointing at the confluence of events beginning in 2020. At this time, federal fiscal policy will be a drag on economic growth and monetary policy is expected to have transitioned from accommodative, to neutral, and potentially even restrictive. Should this fully come to pass, a recession is likely to follow. However, this outcome is not a foregone conclusion. Rather, for really the first time this cycle, it is a reasonable, and clear scenario for how this expansion ends. Even so, between now and then, economic growth is expected to be at or above potential.

Here in Oregon, the economy follows the U.S. business cycle overall, albeit with more volatility. The good news is job gains are enough to match population growth and absorb the workers coming back into the labor market. Wages are rising faster than in the typical state, as are household incomes. That said, growth is slower today than a few years ago. The regional economy continues to transition down to more sustainable rates. Ongoing improvements in these deeper measures of economic well-being are also expected to continue.

Oregon’s economic expansion has largely played out as expected in recent months, yet state revenue collections continue to outpace the forecast.  Much of the strong revenue growth can be traced to temporary factors, including the response of Oregonians to federal tax law changes and a spike in estate tax collections. Together with the fleeting nature of recent tax collections, Oregon’s unique kicker law is acting to mute the budgetary impact of unexpected revenues.  While more revenue is now expected to be collected during the current biennium, less will be available during the 2019-21 budget period.

Although it will take some time for all of the impacts of the federal tax law changes to be known, Oregon’s taxpayers have clearly been responding to the new environment.  Since the federal changes were announced, advanced payments of personal income taxes are up 24% relative to last year.  Advanced corporate tax payments are up more than 50% over the same period.  Although state tax liability has been boosted somewhat in the near term due to the federal reforms, recent payments have been far larger than what could reasonably be expected due to the direct impact of the law changes.  It is likely that collections will cool down going forward as households and businesses reconcile their annual tax bills.

Should the September forecast come to pass, Oregon’s taxpayers will easily trigger both the personal income tax kicker and corporate kicker laws during the 2017-19 biennium. Both kickers — $686 million for personal, $208 million for corporate – would be the largest dollar amounts seem in more than a decade. However, the regional economy and tax liability are bigger today as the state grows. When measured as a share of tax liability, or a share of tax collections, the projected kickers from 2017-19 are smaller than most historical kickers.

The current corporate kicker is largely the result of an expected $245 million in additional revenue as a result of the new federal tax law that requires the repatriation of deferred foreign income. The personal kicker will be paid out as a credit on Oregonian tax returns in April 2020, or right as the economic drags weigh on growth. According to the September forecast, non-corporate General Fund revenues (the personal kicker base) are expected to exceed the Close of Session forecast by 3.7% at the end of the biennium.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | August 27, 2018

Start-Ups, R&D, and Productivity

Right now, even as the economy is hitting the sweet spot, long-run growth expectations remain subdued. This does not mean the economy cannot have a good year or three of growth, let alone a strong quarter or two. However, economic output can be thought of as the number of individuals working, how many hours they work, and how much they produce every hour. The reason why long-run growth is forecasted to be slower than in the past is because these factors are currently growing at very slow rates. And they are expected to continue at slower rates moving forward. See Jason Furman’s summary for an accessible deeper dive into these issues and trends.

Out of these factors, the one that is least understood, and possibly the most likely to differ from forecast is productivity. Economists are increasingly researching and discussing this substantial slowing in productivity, but have yet to reach a clear consensus as to what is driving it. The fact that the slowdown in productivity is worldwide, and not just in a specific country or two further complicates the analysis.

That said, there are a few encouraging signs in terms of new business formation, and research and development spending, that could — I stress could — potentially lay the groundwork for better productivity gains in the future. Another potential factor is the tightening labor market. When workers become more expensive (higher wages), businesses may invest in more equipment and software to offset those costs (replace workers with technology). Should these productivity gains come to fruition, then longer-term economic growth prospects would certainly be raised, and would also allow for more wiggle room for the Fed to navigate through the current danger zone, as Tim Duy recently discussed.

First, new business applications here in Oregon are on the rise. They now exceed the numbers at the peak of the last expansion. The upward trend in the absolute number of new businesses is encouraging, however start-ups are a smaller share of all firms than in the past. These business applications are an imperfect measure. However the good Census data comes with a considerable lag. And the program was revamped not too long ago. New state level data on firm age has not been released in years at this point, so our office is focusing on more timely measures to help gauge recent trends. See our previous report for a more in-depth discussion.

Furthermore, these trends in recent years provide zero guarantee that productivity will actually accelerate. For example, even as spending on R&D recently hit a historic high in terms of the share of GDP, it has been operating in a fairly narrow band in recent decades. While this is true at the top line, there has been a clear shift in R&D as the public sector pulls back – especially following the winding down of the space program and the cold war – and the private sector steps forward. The upward march in private sector R&D is encouraging. Now, what really matters most is the return on or success of this R&D spending, not just whether it happens or not.

The decline in start-ups and in productivity is well-documented, if not well-understood. Stay tuned for a follow-up post in the coming weeks where I will dive a bit more into our office’s expectations on the role of technology, automation, and productivity in the economy. There is quite a bit of chatter, and some genuine concern that there is a coming wave of technological change that will drive up unemployment. In our view, it is not so much about being a techno-optimist, or techno-pessimist, but rather being a techno-realist*.

* Credit for techno-realist goes to Gail Krumenauer, economist with the Oregon Employment Department. I am just borrowing her great phrase and am jealous I didn’t come up with it.

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